Thursday, November 17, 2016

Mexico raises rate 50 bps to curb inflation from peso fall

Mexico's central bank raised its benchmark target for the interbank overnight rate by another 50 basis points to 5.25 percent to counter inflationary pressures and dampen inflation expectations and said it would continue to keep a close eye on the impact of the lower peso to consumer prices in order to take any necessary measures to keep inflation close to its 3.0 percent target.
The Bank of Mexico, which has now raised its rate by 225 basis points following the U.S. Federal Reserve's rate hike last December, said the possible implementation of measures that would hinder trade between the U.S. and Mexico had worsened the balance of risks facing Mexico's economy.
Also, there has been a clear rise in inflation expectations in response to an expected expansionary fiscal policy by the Trump administration, which has strengthened the arguments in favor of an increase in rates by the Federal Reserve in December and a more accelerated pace of rate hikes, and of a higher than anticipated size of rate hikes, the central bank said.
Mexico's inflation rate rose to 3.06 percent in October as underlying inflation is responding to the depreciation of the peso, with inflation expectations showing a moderate rise.
Although the central bank said financial markets were still pricing in inflation of around 3 percent - the central bank's target - for 2016, 2017 and by the end of 2018, it added that this forecast was subject to the risk that the deprecation of the peso would persist, generating second-order effects that have an adverse impact on prices.
The peso has been under pressure against the U.S. dollar since November 2014 and fell to record lows in the wake of the election victory of Donal Trump, who has threatened to renegotiate trade deals with Mexico and build a wall between the two countries.
The peso fell around 11 percent to 20.7 per U.S. dollar after Trump's victory and was trading slightly higher today at around 20.4 to the dollar following the central bank's rate hike.